How to Measure Financial Progress |
Posted: April 18, 2021 |
Improving personal finances is a ubiquitous goal. For the vast majority of the population, finances are an area of significant stress. As you seek to improve your finances, though, sometimes it’s hard to track your progress. Today, I am sharing how to measure your financial progress to help keep you motivated in your financial life. Let’s get started! How Companies Measure Financial ProgressFirst, I’m going to start with a business analogy. Companies measure their financial status using financial statements. The most important of these statements are the income statement and balance sheet. When it comes to measuring your financial progress, your strategy should be much the same. You need to create your own personal financial statements to measure just how much progress you’re making. Next, I will explain the income statement and balance sheet and how they apply to your finances. The Income StatementFirst, let’s talk about your income statement. When companies talk about their income statements, they are talking about revenue minus expenses. The amount leftover is their net income – the amount that they earned. Interestingly, this analogy translates perfectly to personal finances. Your revenue is what you earn (from your day job, investments, side hustles, etc.), and your expenses are what you spend. I want you to start thinking about your own income statement. I suspect you know about the amount of money you bring in, the revenue side of the equation, but many people fall short when measuring their expenses. So, what are you to do? You need to budget! Budgeting sounds like tired advice, but that’s because it works. Until you start tracking your outflows, it is near impossible to make financial progress. Your goal is to grow your bottom line – your net income. The only way to do this is by increasing the difference between your income and your expenses. So, your choices are to grow your income or decrease your expenses. And bluntly, it’s a lot easier to reduce your expenses than it is to increase your income. Over time, this net income translates to a powerful personal finance booster. This “extra” money becomes your savings for retirement, your primary home purchase, and other investments. The more money you can bring to your bottom line, the more income-producing assets you can acquire, which brings us to the balance sheet. The Balance SheetWhile the income statement is vitally important, it only captures a company’s performance over a short period. The balance sheet, by comparison, measures a company’s cumulative financial performance. The balance sheet measures assets and liabilities – what a company owns vs. what it owes. When it comes to keeping tabs on your finances, you’ll want to do the same thing. You’ll want to track everything you own and everything you owe. Make a list of assets, including things like your house, your retirement accounts, etc.) and a list of liabilities (such as your mortgage, car payments, student loans, etc.). The difference between your assets and your liabilities is your net worth. I highly recommend using a net worth tracker, as you can track your net worth easily over time. Net worth becomes the best way to measure financial progress over time because it allows you to understand cumulative progress. Measuring Financial Progress: Tying it All TogetherAs you seek ways to improve your finances, start by gauging your personal income statement. Your goal is to look for ways to increase what you bring in and reduce what you spend. In doing so, you’ll grow your net income – the amount that you can then apply towards retirement and investing goals. That net income ultimately flows through to your balance sheet – the list of what you own vs. what you owe. Driving more net income leads to owning more assets and having fewer liabilities. Over time, if you’re improving your income statement, you’ll see your net worth (your balance sheet) grow as well. In taking these two elements together, you’ll set yourself up for financial improvement in both the short and long run. So, start getting your finances in shape and watch your wealth grow!
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